Updated June 4, 2021
Reading time: 5 minutes
Here at Insurify, homeowners often ask us whether they can deduct the cost of insurance from their federal tax liability. Unfortunately, the answer is almost always no. In most cases, home insurance is not tax-deductible.
While the IRS isn’t likely to cut you a break come tax season, certain states do offer tax relief for homeowners struggling with high insurance premiums. Most of these deductions are meant to encourage those in high-risk areas to fortify their properties against disasters by retrofitting their homes to make them more resilient or by saving up a nest egg that could cover needed storm repairs.
Retrofitting your home to make it safer can directly lower your premium, in addition to providing a tax break. Many home insurance providers are required by state law to offer mitigation discounts for qualifying renovations. These discounts can reduce premiums by as much as 60 percent in some cases. Online home insurance comparison tools like Insurify make it quick and painless to identify which providers offer such discounts in your area.
We can be honest here: tax season is terrible. Most of us aren’t experts in tax law and don’t have the luxury of paying an accountant to manage our books. In fact, a wad of receipts stuffed in the car’s glove compartment is what passes as “the books” for most of us.
That being said, we’d forgive you if the very mention of “tax season” made you want to set that receipt-wad on fire. (Spoiler alert: Your car insurance probably won’t cover the resulting damage.)
Discomfort aside, if there is one tax concept worth having a conversation about, it’s deductions. They are your friends. But what is a deduction, anyway?
In plain terms, a deduction is anything that lowers your taxable income and, as a result, what you owe the government when you submit your tax return. If you play your cards right, the government might even owe you. (Gasp!)
There are a lot of expenses that qualify as deductions—at both the federal and the state level. Many of them are not very well-known, and unless you actually are an accountant, you might miss them entirely. We don’t want that to happen, which is why we’ve put together this guide on some little-known deductions that can add up to big savings. You can invest that extra pocket change in a nice binder to keep all those receipts organized. (Goodbye, glove compartment clutter.)
One of the easiest ways to reduce your tax burden—and lower your premium—is to invest in making your home safer. Insurance companies base their entire business on risk. If you can show that you’ve made your home less susceptible to damage, you’re a safer bet, and most companies will reward you for the effort. In some cases, so will the government.
Three states—Alabama, Louisiana, and South Carolina—have mitigation programs that allow residents to deduct the cost of retrofits that make their homes more resilient to windstorms. Think installing storm shutters, putting on a new roof, or replacing old windows with new, impact-resistant glass.
California lawmakers voted overwhelmingly in 2015 for a proposal that would have provided similar relief for earthquake retrofits, but the governor vetoed it when it arrived on his desk. A similar bill has been proposed this year, but its prospects aren’t clear.
In Alabama, folks are luckier. Homeowners can deduct the lesser of $3,000 or 50 percent of eligible project costs from their state income taxes. To qualify, the work must be on the taxpayer’s legal residence, conform to one of several applicable building standards, and be certified by a licensed building inspector.
Alabama residents can also set money aside in a designated Catastrophe Savings Account (CSA)—a special type of tax-exempt bank account used to cover the cost of insurance deductibles and storm repairs. Any contributions to the CSA—up to a certain amount—and any related interest income can be deducted from the account holder’s state tax liability.
Louisiana doesn’t have a CSA program like Alabama’s. However, residents of the state are permitted to deduct as much as $5,000 of work needed to bring the home into compliance with the state’s Uniform Construction Code.
Before you cash in on this deduction, you do have to check a few boxes. First, you must claim the homestead exemption on your ad valorem or property taxes. Second, you can only deduct the cost of improvements made to your legal residence, not a second home or investment property. And the deduction cannot be used to offset the cost of improvements that were required because the structure was new or had been damaged already. That is, you need to have elected to improve your property to qualify.
Mississippi doesn’t allow homeowners to deduct the cost of retrofits from their state income taxes, but residents can deduct CSA contributions, distributions, and interest. Money set aside in a CSA can be used to cover the account holder’s insurance deductible, as well as the cost of uninsured losses related to any “catastrophic event.”
Qualifying events include windstorms, cyclones, earthquakes, hurricanes, ice storms, tornadoes, high winds, floods, hail, or any other “act of God,” according to the state’s insurance department. The term “catastrophic event” also covers any event declared a disaster by executive order of the president or the governor.
South Carolina offers more insurance-related deductions to its residents than any other state in the country. Homeowners here can claim deductions for windstorm mitigation work and money contributed to their CSA. Residents with particularly high insurance premiums can even qualify for a third income tax credit meant to ease the burden on the state’s most at-risk property owners.
South Carolina’s rules around mitigation deductions are a bit less generous than those offered by other states. Deductions for eligible windstorm and flood mitigation work are capped at $1,000—or 25 percent total costs, whichever is less. As is the case elsewhere, the work must adhere to approved construction standards and must be on the taxpayer’s legal residence to be eligible.
South Carolina residents can also deduct CSA contributions, distributions, and interest income. However, CSA funds can only be used to cover expenses related to floods, windstorms, and hurricanes that have been declared an emergency by the governor.
Finally, South Carolina homeowners can claim an additional income tax credit of up to $1,250 if they spend more than five percent of their annual income on home insurance. Any unused credit can be carried forward for five years. This provision, known as the “Excess Insurance Premium Tax Credit,” applies only to state income tax and is only applicable to your legal residence.
A number of states have proposed novel tax incentives to help offset insurance costs. However, as of 2020, the ones listed here are the only ones that have passed. If you’re interested in seeing lawmakers in your state adopt similar policies, you can always write to them and ask. Even in states where tax incentives aren’t available, many insurance providers offer discounts for renovations to make your home more resilient. Likewise, having a disaster savings account is important, whether or not your state allows you to claim a deduction for those savings.
It’s safe to say that you should always keep your receipts when dealing with tax deductions. While you’ll probably never have to use them, the last thing you want is to be audited and find that you, for instance, set all your receipts on fire. In the case of CSAs and retrofit deductions, you’ll also want to keep any documents related to the repairs or improvements you deducted (i.e., building permits, contracts, inspection certificates, etc.)
FORTIFIED is a popular set of construction standards administered by the Institute for Building and Home Safety. The program exceeds most building codes by improving the performance of buildings against natural disasters and reducing the risk of personal property losses. Some states, like Alabama, offer insurance discounts and tax incentives to property owners whose homes are built to the FORTIFIED home standard.
T.S. Strickland is an award-winning journalist and brand strategist based in Pensacola, Florida. His work has been published in the Washington Post, USA Today, Entrepreneur, National Fisherman and elsewhere. When he's not writing, T.S. enjoys kayak fishing, cooking and going on walks with his Australian Shepherd, Rosie. He tweets @TSStrickland1.Learn More